MSME GROWTH INNOVATION AND INCLUSIVE …documents.worldbank.org/curated/en/584491468034205771/pdf/E47180V...MSME Growth Innovation & Inclusive Finance Project Environment & Social

MSME Growth Innovation & Inclusive Finance Project Environment & Social Risk Management Framework – Volume I

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MSME GROWTH INNOVATION AND

INCLUSIVE FINANCE PROJECT

Environment & Social Risk Management Framework

Volume I

December 31, 2014

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA

(SIDBI)

E4718 V1

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Executive Summary – Environmental Risk Management Framework for MSME -IIF

In line with the Government of India’s (GoI) request, the World Bank is facilitating support for

MSME Growth Innovation and Inclusive Finance Project [MSME –IIF] which will focus on

financial intermediation to the MSME sector, in India. Small Industries Development Bank of

India (SIDBI) is the Borrower and implementing agency for the project.

The Project Development Objective (PDO) is to improve access to finance of MSMEs in

manufacturing and service sectors from early to growth stage firms, including through

innovative financial products. The MSME-IIF supports financing of such projects and parallel

technical assistance (TA) to support such financing.

The financing to MSMEs under the Project will be provided by SIDBI directly as well as

through other Participating Financial Institutions (PFIs) through refinancing arrangement. For

its direct financing, SIDBI will use loan appraisal criteria and procedures agreed between

SIDBI and the World Bank and detailed in the Operations Manual (OM). In the refinancing

model, SIDBI is the wholesaler and the PFIs are intermediaries. The PFIs will extend sub-

loans to eligible MSMEs and shall approach SIDBI for refinancing these loans.

The project has three components:

(i) Spurring early stage finance

(ii) Supporting service sector financing models,

(iii) Supporting finance to manufacturing MSMEs.

SIDBI has developed and adopted an Environmental and Social Risk Management

Framework (ESMF) under SME Finance and Development programme [SMEFDP] through

World Bank assistance, which will be continued to be followed under the proposed project

Leveraging the past experience, the safeguards management for the current project will be

addressed through a risk based approach and by updating the ESMF. The key components

of ESMF will include: (a) identification and preparation of positive list of MSME sectors with

reference to their respective pollution potential and environmental regulatory requirements in

to three risk categories – low, medium, and high; (b) defining the environmental due

diligence as well as management requirements for each risk category; (c) integration of

these requirements in to SIDBI’s credit risk management; and (d) implementation, monitoring

and supervision support including institutional capacity aspects.

While updating the ESMF framework, the applicable in country environmental regulations

and WBG policies have been reviewed and the following aspects have been internalized: (a)

waste minimization, pollution prevention, and cleaner production approaches; (b)

environmental assessment provisions; (b) occupational health and safety aspects. The


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Environment, Health, and Safety Guidelines of the World Bank Group have also been

integrated, where relevant.

Based on the regulatory framework and the environmental risks associated with different

types of units, the MSMEs have been classified as E-I, E-II, and E-III where E-I category

units have higher potential for environment risks followed E-II and E-III, where E-III category

units are of low risk.

The E&S risk management framework primarily targets to direct finance projects and project

cycle for these projects comprise of following key activities

Project Screening

Project Appraisal

Loan Sanction

Disbursement &Project Monitoring

The Safeguards Due Diligence (SDD) will be carried out as an integral part of loan

processing mechanism with relevant management measures integrated as part of credit risk

management in the SIDBI’s Project Cycle. The project also has provision for detailed

safeguards due diligence by the E&S specialist (ESS).

The monitoring and reporting on E&S safeguards management will be carried out at two

levels. The first level monitoring and reporting relates to branch level coordination with the

MSMEs. The second level of monitoring and reporting pertains to PIU level effort where, the

ESS will synthesize the branch level reporting to prepare half yearly reports. In addition, ESS

will conduct regular audit and verification of compliance of E&S safeguards requirements.

ESS will also cover half yearly monitoring and reporting of status of implementation of E&S

management measures and/or compliances for indirect financing cases. The monitoring and

reporting efforts will also focus on documenting good practices as well as lessons learnt on

regular basis. The half yearly reports will be regularly shared with the World Bank.

For the project’s administration and implementation, SIDBI has identified a multi-vertical core

team which will serve as the project implementation unit (PIU). The PIU is headed by the

Country Head and the PIU members have prior experience of working with the Bank and

other multi-lateral and bilateral partners. SIDBI will also undertake orientation and capacity

building on Environment and Social aspects of the project targeting credit officers, SMEs and

cluster associations, PLIs.

Loan Extension Services (LES) are also proposed as part of the lending activities under

component 3 for manufacturing sector wherein depending on the type and categorisation of

unit (E I or E II category), the appraisal could include a quick opportunity assessment for

overall improvement of the unit which may include energy efficiency, cleaner production,

lean management, etc.. Operationalising this effort would require commissioning of

consultancy services to provide pool of technical expertise to SIDBI appraisal officers and

including technical staff within SIDBI to coordinate LES activities.

The E&S Framework for MSME-IIF project has been shared with the Regional Offices of

SIDBI and the feedback has been positive. SIDBI would continue to update the frame work


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depending on law of the land and based on consultations from stake holders which would be

an ongoing exercise.

SIDBI is confident that MSMEs will stand benefited through this initiative and the whole

process will get institutionalized in the financial system.

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TABLE OF CONTENTS

ENVIRONMENT& SOCIAL RISK MANAGEMENT FRAMEWORK – VOLUME I

S. No. Particulars Page Nos.

ESMF

1. Introduction 1

1.1 MSME Growth Innovation & Inclusive Finance Project (MSME –IIF) 1

1.2 Project Beneficiaries 1

2. Approach to Environmental& Social Risks and Management 2

2.1 ESMF Approach 2

2.2 Regulatory Framework 3

2.2.1 Legal Provisions 4

2.2.2 World Bank Group E&S Safeguards 6

2.2.3 Summary of Potential Environmental Risks 6

2.2.4 Social Development (Safeguards) 9

2.3 SIDBI’s Project Cycle 10

2.3.1 Project Screening 10

2.3.2 Project Appraisal 11

2.3.3 Loan Sanction 11

2.3.4 Disbursement, Project Follow-up & Monitoring 11

2.4 Application of E&S Safeguards as a part of SIDBI’s Corporate Responsibility

12

3. Safeguards Due Diligence Process 14

4. Project Institutional and Implementation Arrangements 20

List of Boxes

Box No. Particulars Page Nos.

1 Environment & Social Policy 2

2 Direct & Indirect Financing Operations of SIDBI 10

3 Environmental& Social Safeguards in the Direct Lending Operations of SIDBI

13

List of Tables

Table No. Particulars Page Nos.

1 Summary of Potential Environment Risk 8


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List of Exhibits

Exhibit No. Particulars Page Nos.

1 Roles & Responsibilities of Stake Holders for Implementation of Environmental & Social Risk Management Framework

18

2 Organogram 22

List of Annexures

Annexure No.

Particulars Page Nos.

1 Environmental & Social (E&S) Checklist 23

2 Safeguards Due Diligence (SDD) Report 26

3 Loan Extension Services for MSMEs 27


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ABBREVIATIONS

AAQ – Ambient Air Quality

BAT – Best Available Technologies

BOP – Best Operating Practices

CEPI – Comprehensive Environmental Pollution Index

CPCB – Central Pollution Control Board

CREP – Corporate Responsibility for Environmental Protection

EHS – Environmental, Health and Safety

EIA – Environment Impact Assessment

ERMF – Environmental Risk Management Framework

ESDD – Environmental Safeguards Due Diligence

GIIP – Good International Industry Practice

GRP – Green Rating Program

GoI /GOI – Government of India

HVAC – Heating Ventilation and Air-Conditioning

MoEF – Ministry of Environment & Forests

MSME – Micro, Small and Medium Enterprises

OM – Operations Manual

PDO – Project Development Objective

PFIs – Participating Financial Institutions

SIDBI – Small Industries Development Bank of India

SPCB – State Pollution Control Board

SST – Sector-Specific Technologies

TA – Technical Assistance

WBG – World Bank Group


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1. INTRODUCTION

Micro, Small and Medium enterprises (MSME) sectorcontributes around 45 percent

to manufacturing output and about 40 percent of exports (directly and indirectly).

Furthermore, entrepreneurship and business creation by MSMEs is crucial for large-

scale employment generation. There is widespread recognition within India, and

globally, that vibrant MSMEs are a key engine of economic growth, job creation and

greater prosperity and that a vibrant entrepreneurial ecosystem fosters innovations

and contributes to greater dynamism in the economy.However, the growth of the

MSME sector has been constrained due to various factors including due to lack of

access to finance.Limited financing to three vital areas – early stage/start-ups,

services and manufacturing – within the MSME sector has been a critical constraint.

1.1 MSME Growth Innovation & Inclusive Finance Project – MSME-IIF

The Project Development Objective (PDO) is to improve access to finance of MSMEs

in manufacturing and service sectors from early to growth stage firms, including

through innovative financial products. The MSME Growth Innovation & Inclusive

Finance Project (MSME-IIF)supports financing of service and manufacturing sector

firms including early stage firms and parallel technical assistance (TA) to support

such financing. The project has three components: (i) Spurring early stage finance

(ii) Supporting service sector financing models, (iii) Supporting finance to

manufacturing MSMEs.

Small Industries Development Bank of India (SIDBI) is the borrower and the

implementing agency for the project. The financing to MSMEs under the Project will

be provided by SIDBI directly as well as through other Participating Financial

Institutions (PFIs).For its direct financing, SIDBI will use loan appraisal criteria and

procedures agreed with the Bank and detailed in the Operations Manual (OM). In the

refinancing model, SIDBI is the wholesaler and the PFIs are intermediaries.The PFIs

will extend sub-loans to eligible MSMEs and shall approach SIDBI for refinancing

these loans.

1.2 Project Beneficiaries

MSMEs in the manufacturing and services sector will be the primary beneficiaries of

the Project. In addition, SIDBI and the PFIs will be beneficiaries of theaccompanying

technical assistance to support their capacity and growth into the financing activities

that the project supports.


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Box 1: Environment and Social Policy

Small Industries Development Bank of India (SIDBI), the apex institution with the responsibility of promotion, finance and development of Micro, Small and Medium Enterprises (earlier classified as Small Scale Industries (SSI) in India, strives to promote sustainable development for all small and medium enterprises.

SIDBI’s initiatives in the past and future are aimed to reduce environmental and social risks by promoting:

Compliance to applicable Indian environmental and labour legislations

Cleaner production methods

Energy and water saving methods

Utilization of appropriate technologies

No use of child labour and forced labour

As the projects financed by SIDBI are small and medium, it will ensure the above by:

capacity building of their staff on environmental and social risk management procedures

regular training and awareness of their staff

creating awareness for industry borrowers

Strengthening Environment and Social procedures by integrating E&S consideration in all Phases of life cycle.

Updating Environment and Social Management Framework at regular intervals

2. APPROACH TO ENVIRONMENTAL AND SOCIAL RISK MANAGEMENT

FRAMEWORK

2.1 ESMF APPROACH

As described in the previous sections of this report, the proposed project will finance

MSME sector through lending operations covering Manufacturing and service sectors

by SIDBI, and by PFIs through refinancing arrangement. Going by the past trends

recorded under “SME Finance and Development Project (SMEFDP)” financed by the

Bank, the lending activities would almost be in the brown field units, with few

exceptions of green-field projects. In this context, the environmental issues to be

adequately addressed include: (a) the current status of target sectors vis-à-vis

environmental performance from the regulatory and reputational risks point of view;

(b) the environmental impacts of proposed investments in the form of production

scaling up or technology up gradation; and (c) environmental impacts in case of

greenfield projects – although the new units under MSME sector can only be

established in prior-recognized industrial estatesor non agricultural lands in industrial

/ commercial areas or

naturally developed

clustersexcept for a few

service sector projects which

could be on commercial

properties. These issues, if

not ascertained by SIDBI

during loan appraisal, could

potentially lead to credit,

environmental, regulatory, as

well as reputational risks.

Importance of such issues

would vary from credit risk

perspective depending on

type and nature of MSME

sectors vis-à-vis pollution

potential. Also, the

issues/risks are not

amenable for upfront

identification to design a

particular environmental

management plan to fit all.

Given the foregoing, under

SMEFDP, SIDBI has

developed and adopted an Environmental and Social Risk Management Framework

(ESMF). The E&S policy developed by SIDBI under SMEFDP, which will be

continued to be followed under the proposed project is presented in the Box 1.Using


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ESMF, SIDBI has streamlined its lending processes for addressing safeguards risks.

Through the previous project, SIDBI has also taken credible initiatives to build the

capacity of loan officers.

Leveraging the past experience, the safeguards management for the current project

will be addressed through a risk based approach and by updating the ESMF. The key

components of ESMF will include: (a) identification and preparation of positive list of

MSME sectors with reference to their respective pollution potential and

environmental regulatory requirements in to three risk categories – low, medium, and

high; (b) defining the environmental due diligence as well as management

requirements for each risk category; (c) integration of these requirements in to

SIDBI’s credit risk management; and (d) implementation, monitoring and supervision

support including institutional capacity aspects.

While updating the ESMF approach, the applicable in country environmental

regulations and WBG policies have been reviewed and the following aspects have

been internalized: (a) waste minimization, pollution prevention, and cleaner

production approaches; (b) environmental assessment provisions; (b) occupational

health and safety aspects. The limitations noted as part of updating the ESMF

include: (a) many of the environmental management retrofits may not be feasible as

the project will be mostly covering brown field units with less than one percent of

greenfield units in the project portfolio; (b) while the loan processing will include Loan

Extension Services as part of the TA to promote cleaner production and energy

efficiency, it would not be practically plausible to confirm to WBG emission

guidelines; and (c) limitations of WBG’s EHS guidelines, especiallyin the context of

lower order of production levels which are much less than the threshold levels

defined under EHS guidelines. In this context, the risk management approach

defined above would be most appropriate to minimize the environmental issues and it

has also been time tested through World Bank financed SME Finance and

Development Project and WB-GEF’s Financing Energy Efficiency at MSMEs Project.

Based on the above approach, the ESMF is updated considering: (a) Recently

updated Environmental Regulations of Government of India as well as World Bank

Policies; and (b) SIDBI’s Project cycle to facilitate and integrate ESMF in to the

lending process/operations. The following sections of the report provide the details

on these two aspects.

2.2 REGULATORY FRAMEWORK

Micro, Small, and medium-sized enterprises (MSMEs) are amongst the most

important sectors of India’s economy. Owing to their labour intensive operations, they

provide employment opportunity for millions of individuals and have contributed

largely towards economic development of the nation.


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Although the scales of operations are small in nature, the MSME sector also has

industrial operations which could lead to adverse environmental impact due to the

sheer number of units. Such nature is especially reflected in resource and emission

intensive trades such as metal finishing, leather tanning, dry cleaning, printing and

dyeing, brewing, food processing, chemical production, etc. High shop floor pollution,

occupational health hazards, hazardous waste generation, toxic emissions and

effluent discharge, low energy efficiency, polluting processes, etc are some key

environmental issues of SME sector. Social issues in Indian SME sector pertaining to

use of child/forced labour also exists in small measure. Exploitation of workforce vis-

à-vis payments and work hour structure also continues to prevail in some units within

theSME sector.

While their regulatory compliances have been less than desirable in the past, there

have been considerable efforts over the last 5 years to mainstream MSME

compliances through various initiatives led by Central and State Governments, and

banks and financial institutions. The efforts in the recent past to improve regulatory

compliances and environmental management at MSMEs include:

Sensitization of MSMEs about environmental impacts of industries including public health

& safety issues.

Awareness building environmental regulatory obligations, and compliance requirements

Labour laws and environment, health and safety aspects and the importance in MSME

operations

Combined effluent treatment facilities to address economies of scale

Adoption of cleaner production methods including integration of Energy Efficiency and

lean manufacturing processes.

Integration of environmental management aspects in to credit risk management by the

banks and FIs.

Many of the above initiatives were successfully implemented by the banks and FIs –

for example, environmental management through credit risk management is

effectively addressed through SME Finance and Development Project financed by

the World Bank; Resource/Energy Efficiency is promoted through KfW, JICA, and

World Bank – GEF projects; etc. Therefore, it is imperative for the financiers to

assess E&S risks more effectively, to minimize credit risks

2.2.1 Legal Provisions

Financial Institutions do not have direct obligation under Indian environmental

legislations. However, the E&S risk management framework for SIDBI was

developed during 2005 considering legal obligations of SIDBI’s SME portfolio under

Indian environmental & social laws. In addition, elements of World Bank’s safeguard

policies and international standards/ norms have been incorporated in the design of

the framework.


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The Ministry of Environment, Forests and Climate Change (MoEF&CC), Government

of India, periodically formulates / update environmental acts, which further

supplemented by rules and regulations. Central Pollution Control Board (CPCB) acts

as the central agency for overall coordination with state agencies, State Pollution

Control Boards (SPCBs), are mandated to enforce provisions of the rules. SPCB

however, have been vested with authority to make those rules more stringent as per

the requirement of the state.

Regulatory requirements vis-à-vis social issues are governed by various acts, rules

and regulations, prominent of which is Factories Act, 1948 and subsequent

amendments. These detail various measures to be taken by any industry operator for

health and safety of the workers. Issues of use of child labour, forced labour,

compensation, working hours, right to form associations, etc. have been addressed

by the Indian government under corresponding acts and rules listed in the following

section.

Indian constitution provides the basic principles of environment protection and

preservation through Articles 48A and 51A (g), included during 42nd amendment in

1976. These articles provide that:

The State shall endeavour to protect and improve the environment and to safeguard

the forests and wildlife of the country (Article 48A).

Every citizen of India has a duty to protect and improve the natural environment and

to have compassion for living creatures (Article 51A (g)).

Based on above principles, Government of India, has laid downs various Acts and

Rules to ensure environmental perseverance and protection. The relevant Indian

Environmental and social laws applicable to SMEs are listed below.

Environment Laws

Water (Prevention and Control of Pollution) Act, 1974 (as amended in 1988) & Water

(Prevention and Control of Pollution) Rules, 1975 (as amended in 2011)

Water Cess (Prevention and Control of Pollution) Act, 1977 (as amended in 1992) &

Water Cess (Prevention and Control of Pollution) Rules, 1978.

Air (Prevention and Control of Pollution) Act, 1981 (as amended in 1987) and Air

(Prevention and Control of Pollution) Rules, 1982

Environment (Protection) Act, 1986 (as amended in 1991) and Environment (Protection)

Rules, 1986

Environmental Impact Assessment Notification, 2006 and subsequent amendments

Hazardous Wastes(Management, Handling and Transboundary Movement) Rules, 2008

Municipal Solid Wastes (Management & Handling) Rules, 2000

The e-waste Management (Management & Handling) Rules 2011

Bio-Medical Waste (Management and Handling) Rules, 1998

Noise Pollution (Regulation and Control) (Amendment) Rules, 2000

The Forest Conservation Act, 1980 (as amended in 1988).

Coastal Regulation Zone (CRZ) Notification, 2011 and subsequent amendments

The Wildlife Protection Act, 1972 (amended in 2006)


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CPCB & SPCBs Guidelines for Classification of Industries in to Red, Organic and Green

Category.

CPCB & SPCBs Standards for Emissions or Discharge of Environmental Pollutants from

Various Industries

Eco-sensitive Zones and Protected Area declared under Environmental (Protection) Act

1986 (such as Aravalli Range, Pachmarhi Region, Doon valley, Mount Abu, etc.)

Health & Safety Regulations

Manufacture, Storage and Import of Hazardous Chemical (MSIHC) Rules, 1989 and

subsequent amendments

Chemical Accident (Emergency Planning, Preparedness and Response) Rules, 1996

Public Liability Insurance Act, 1991amended in 1992 and public liability Insurance Rules

1991 amended in 1993

The National Environment Tribunal Act, 1995

The National Environment Appellate Authority Act, 1997

The Biological Diversity Act, 2002 and Biological diversity rules 2004

National Green Tribunal Act, 2010 (No. 19 of 2010)

The Insecticides Act, 1968 and the Insecticide Rules, 1971.

Factories Act, 1948, Factories Rules, Factories (Amendment) Act, 1987 and Model Rules

Social Laws

Child Labour (Prohibition and Regulation) Act, 1986

Bonded Labour System (Abolition) Act, 1976

Minimum Wages Act, 1948

Workmen’s Compensation (Amendment) Act 2009

2.2.2 The World Bank Group E&S Safeguards

The World Bank Group, in its policies has stipulated that all investments made should

be environmentally sustainable. In addition to country regulations, the safeguards

management for MSME-GIIF Project will be in line with the provisions under

“Operation Policy 4.01- Environmental Assessment” of the World Bank. Also the

Environment, Health, and Safety Guidelines of the World Bank Group have also been

integrated, where relevant.

2.2.3 Summary of Potential Environmental Risks

Based on the regulatory framework and the environmental risks associated with

different types of units, the MSMEs have been classified as E-I, E-II, and E-III where

E-I category units have higher potential for environment risks followed E-II and E-III,

where E-III category units are of low risk. While this categorization is made for

relative understanding of environmental risks, it may be noted that none of the units

in absolute terms will be of significant risk to categorize them as “Category A” type,

as defined in OP 4.01 of the World Bank Policy. This is mainly due to low production

capacities of the individual MSME units. Also, the proposed project finances are

expected to be mostly deployed for brownfield units in the existing clusters which are

recognized by regulatory authorities. Table-1 provides a summary of potential


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environmental risks and categorization thereof. Volume II of ESMF provides a

resource of book of each of the MSME sector reflected in the table. The resource

book presents: (i) manufacturing process; (ii) summary of environmental issues; (iii)

recommended pollution prevention/treatment options; (iv) regulatory obligations to be

complied. The resource book is expected to be ready reference for the loan officers.


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Table-1: Summary of Potential Environmental Risks1

Sl.

NO SECTORS

Air

Pollution

Water

Pollution

Solid/Haz.

Waste CATEGORY

1 Bakeries & Confectionaries L M L E-II

2 Brick kilns H L L E-I

3 Ceramics H L L E-I2

4 Cement Plant H L L E-I

5 Dairy and Dairy products M H L E-I

6 Distilleries M H H E-I

7 Dye & Dye intermediates H H H E-I

8 Edible Oil & Vanaspati L M M E-I

9 Electroplating H H H E-I

10 Engineering units (Cutting and shaping ) L L L E-III

11 Engineering units (Metal surface treatment) H H H E-I

12 Flour and Pulse mills M L L E-II

13 Foundry and Forging units H L M E-I

14 Food & fruit processes L M L E-II

15 Glass H L L E-I

16 Lime Kilns H L L E-I

17 Natural Rubber M L L E-II

18 Organic chemical Industries H H M E-I

19 Paints & varnishes M H M E-I

20 Pesticides H H H E-I

21 Pharmaceuticals (bulk drugs) H H H E-I

22 Pharma (Formulation) L M M E-II

23 Plaster of Paris M L L E-II

24 Plastic Products M L L E-III

25 Pulp and Paper H H M E-I

26 Rice mills L L L E-III

27 Soft Drinks L M L E-II

28 Sports Good Industry L L L E-III

29 Soaps and Detergents L H L E-I

30 Stone Crushers M L L E-II

31 Tannery L H H E-I

32 Textiles (Dying & Printing) L H H E-I

33 Cosmetic Products L M L E-II

34 Meat & Fish Processing / Slaughter House L H L E-I

35 Refractory (without PNG) H L L E-I

36 Wood & Wood Products L L L E-III

37 Electronic & Electrical Goods L L L E-III

38 Garments &Apparel Manufacturing L L L E-III

39 Paper & Paper Board Products L L L E-III

40 Hospitality sector (Hotels / Restaurants, etc.) L M L E-II

41 Health sector (Hospitals, nursing homes, etc.) L L H E-I

1 This will be regularly updated based on country systems and WBG policies

2 Air pollution is the major issue. If the unit uses PNG, the category will be categorized as E-II


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2.2.4 Social Development (Safeguards)

Land Acquisition: The project will not support any MSME operations that would

result in: (i) compulsory land acquisition and physical and/or economic displacement

of people (loss of structures, livelihoods and access to common resources. Hence,

the World Bank’s Policy on Involuntary Resettlement is not applicable. While

majority of the start-up and majority of the MSMEs supported under the project are

expected to be located in designated industrial zones or areas where commercial

enterprises operate from, some MSME project proposals in the manufacturing and

service sector couldalso involve private land purchase in industrial/commercial areas.

In most cases, this cost is likely to be met from MSME owners own

contribution/equity. However, in some cases this could be funded by project

financing, and in such cases proper documentation of such private land transactions

and sale agreements would be maintained.

Tribal People: The project will not be working with individual(s) but MSMEs who are

the primary beneficiary and stakeholder of this project. The project will be supporting

MSME enterprises in the services and manufacturing sectors that typically operate

from designated industrial estates/zones or commercial areas across the country.

The borrowing MSMEs are not expected to be located in areas with collective

presence or attachment of tribal people and as such Indigenous Peoples are not

found in sub-project areas. Hence, the project is not anticipated to have impacts on

indigenous people, their lands, culture, livelihood or way of life. The World Bank’s

Policy on Indigenous People is not applicable.

Child and Forced Labour3 : Social issues in Indian MSME sector pertaining to use

of child/forced labour also exists in small measure. Exploitation of workforce vis-à-vis

payments and work hour structure is also a common phenomenon in MSME sector.

SIDBI’s environment and social policy promotes and ensures Compliance to

applicable Indian labour legislations, including exclusion of any MSMEs that have

presence of child labour and forced labour.

3Forced labor means all work or services not voluntarily performed, that is, extracted from individuals under

threat of force or penalty. Child labor means the employment of children whose age is below the statutory minimum age of employment or employment of children in contravention of International Labor Organization Convention No. 138 “Minimum Age Convention” (www.ilo.org).


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2.3 SIDBI’S PROJECT CYCLE

This section provides a review of SIDBI's Project cycle. This is intended to serve as a

baseline for the subsequent stages of the project involving the development of

appropriate E&S risk management systems for the institution. The baseline review

will enable the development of

an E&S risk management

system that is compatible and

therefore most conducive to

being integrated with the

existing systems and

procedures.

SIDBI’s business activities are

divided into two streams viz.

Direct Finance (DF) and

Indirect Finance (IF) as

detailed in Box 2. This E&S

risk management framework

primarily targets to direct

finance projects and project

cycle for these projects

comprise of following key activities

Project Screening

Project Appraisal

Loan Sanction

Disbursement &Project Monitoring

2.3.1 Project Screening

The loan proposals are sourced at the branches and an officer from the branch is

assigned the role of Relationship Manager (RM) for each proposal. The RM conducts

preliminary project discussion with the client. The prospective client is apprised of

SIDBI’s lending policy and various schemes under which the project could be

financed. RM receives the filled loan application from the client and checks for the

consistency and completion of documentation requirements. Thereafter, a pre-

sanction visit to the unit is carried out by the RM. Subsequently, the RM with the

approval of BO-Incharge forwards the Visit Report and RM Report along with the

loan application and other documents to the concerned Central Loan Processing Cell

(CLPC) for detailed appraisal.

BOX 2 : DIRECT AND INDIRECT FINANCING

OPERATIONS OF SIDBI

Direct Finance business of SIDBI consists of financial assistance

sanctioned & disbursedunder its various schemes & products either

directly to the units in the Micro, Small and Medium enterprises sector

or through other entities / manufacturers / channel partners /

intermediaries for the benefit of the units in the Micro, Small and

Medium enterprises sector. The credit risk under Direct Finance is

borne by SIDBI.

Indirect Finance business of the SIDBI consists of refinance to

Primary Lending Institutions (PLIs). The procedures associated with

the refinancing activities of SIDBI are relatively straightforward. An

institutional limit is assigned by SIDBI, under which refinance is

obtained by the concerned institution. Generally, refinance is sought

for a cluster of loan accounts, with no set periodicity. The information

furnished to SIDBI is limited to basic details such as loan size, location,

promoter’s contribution, portion for which refinance is being sought.


11

2.3.2 Project Appraisal

The proposals are appraised by Centralized Loan Processing Cells (CLPCs) set up

in each regional office. During appraisal, the proposals are rated under Risk Rating

Model (RAM), which is reviewed by a team of officers from Risk Management

Vertical. The Detailed Appraisal Note (DAN) of any project covers following aspects :

i. Introductory, promoters & management ii. Technical aspects (including location, technology, utilities, effluent disposal,

manpower, etc.) iii. Project cost and means of finance iv. Financial/ other parameters v. Schedule of drawal and repayment of the loan vi. Arrangements made/ proposed to be made for working capital vii. Market and selling arrangements viii. Financial and economic viability ix. Status of government approvals x. Favourable and risk factors of the project (SWOT Analysis) xi. Eligibility under lines of credit xii. Terms of sanction

In respect of existing units having three years track record of profitability, for credit

requirements upto exposure of Rs.2 crore; appraisal is done by the branches under

Credit Assessment and Rating Tool (CART).For Secured Business Loan to existing

MSMEs against immovable property as collateral, a simplified appraisal is

undertaken by branches.

Thereafter, the proposals are put up to respective credit committees for sanction.

2.3.3 Loan Sanction

SIDBI’s has a Committee system for sanction of assistance under its direct finance

schemes. There are various levels of Credit committees: Branch Credit Committees

(BCCs), Regional Office Credit & Settlement Committees (RCSCs) and various Head

Office Committees and a Board level Executive Committee. The officers in their

individual capacity do not have any sanctioning powers. The powers of these Credit

Committees are vested under a structured “Delegation of Powers (DoP) approved by

the Board of SIDBI. The loan appraisal along with risk rating report duly reviewed by

Risk Management Vertical (RiMV) is presented to the Credit Committee, which in

turn considers and then sanctions or rejects the project proposal.

2.3.4 Disbursement, Project Follow-up &Monitoring

The RM in the concerned Branch office then completes the pre-disbursement

formalities, which include;

Issue of letter of Intent (LOI) to borrower


12

Ensure compliance with pre disbursement conditions including legal formalities

relating to creation of security

Finalise and sign loan agreement

Process disbursement requests & undertake pre-disbursement visits

Make disbursement to the borrower or machinery supplier

The monitoring function covers (i) end use of funds (ii) operations of the assisted

units vis-à-vis projections (iii) compliance with terms of sanction (iv) securities

offered/ charged and related documentation (v) detection of warning signals,

deterioration in credit quality & changes in management structure, etc. This involves

periodic visits to assisted units, to enable the RM in the branches to assess the

status of operations and identify any warning signals. In addition, borrowers are

required to submit periodic returns, which detail their performance. RM prepares site

visit reports as per standard format. Project completion report is sought from the

borrower after project implementation is completed. If required, external agencies are

also retained for independent review of the project.

2.4 APPLICATION OF E&S SAFEGUARDS AS A PART OF SIDBI’S CORPORATE

RESPONSIBILITY

SIDBI had developed an Environment and Social Management Framework (ESMF)

for its MSME lending in the year 2004. The ESMF has taken into consideration the

relevant environmental and social laws and the World Bank’s safeguard policies and

international standards/guidelines. This framework was adopted by SIDBI under the

SME Financing Development Project (SMEFDP) for the World Bank Line of Credit

and subsequently for implementation of another World Bank-GEF Project, viz.

Financing Energy Efficiency at MSMEs in August, 2010.

In the process of extending its sphere of operations to financing of MSMEs, SIDBI

has developed comprehensive Environment and Social requirements to address E&S

risk that may be arise due to its lending operations in these sectors. Integration of

E&S aspects in SIDBI’s project cycle through various internal circulars issued from

time to time has evolved over a period of time and is an integral part of credit risk

management process. These requirements have been constituted on the basis of

SIDBI’s own environmental policies and procedures, and Indian regulations. Time to

time, the procedures have also considered policies of multilateral development

agencies under various projects financed by World Bank, ADB, and bilateral

agencies including KfW, AfD, etc.

The E&S aspects have already been integrated in the credit due diligence process

which includes the internal Credit Rating Model of SIDBI and are applicable for all

direct lending schemes of SIDBI for MSMEs


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BOX 3: ENVIRONMENTAL & SOCIAL (E&S) SAFEGUARDS

IN THE DIRECT LENDING OPERATIONS OF SIDBI

MSME’s financed by SIDBI, required tocomply with Indian environmental and labour legislations.

Compliance of Indian Environmental & Labour legislations is examined during loan appraisal process and

suitable pre or post disbursement conditions are stipulated at the time of sanction of loans, if required.

Progress of Environmental & Labour legislations compliance is monitored post-financing during project

implementation and in operational stages at the time of various site visits.

Projects based on fly ash products are encouraged.

SIDBI requires that the promoter has carried out environmental assessment, if the project falls under the

list of specified industries covered under Environment Impact Assessment notification, 2006 of MOEF.

Loss of Land / source of income / livelihood, impact on community and cultural property resources,

safeguard of tribal / marginalized and vulnerable groups are not applicable for direct financing MSMEs.

However during consortium funding of infrastructure projects, the requirements of lead member institution

cover this issue.

SIDBI does not finance the following (Negative/Exclusionary List of projects);

Production or trade in any product or activity deemed illegal under Indian laws or regulations or international

conventions and agreements.

Production or trade in weapons and munitions.

Production or trade in alcoholic beverages (excluding beer and wine).

Production or trade in tobacco.

Gambling, casinos and equivalent enterprises.

Trade in wildlife or wildlife products regulated under CITES.

Production or trade in radioactive materials.

Production or trade in or use of unbounded asbestos fibres.

Commercial logging operations or the purchase of logging equipment for use in primary tropical moist forest

(prohibited by the Forestry policy).

Production or trade in products containing PCBs.

Production or trade in pharmaceuticals subject to international phase outs or bans.

Drift net fishing in the marine environment using nets in excess of 2.5 km. in length.

Production or trade in ozone depleting substances (ODS) subject to international phase out.

Production or trade in pesticides/herbicides subject to international phase outs or bans as agreed by GOI based

on Stockholm convention.

Projects requiring compulsory land acquisition causing displacement of people or communities from private or

public lands or any negative impacts on livelihoods.

Projects located inareas of significant settlement of tribal people and adversely affecting the culture, livelihood,

and way of life of tribal people

Production or activities involving harmful or exploitative form of child labour or forced labour..

Projects located in sensitive ecological areas and natural heritage locations.

The E&S safeguards (including the negative / exclusionary list) as applied by SIDBI

in its direct lending operations are indicated in Box 3.


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3. SAFEGUARDS DUE DILIGENCE PROCESS

3.1 DIRECT FINANCE

The Safeguards Due Diligence (SDD) will be carried out as an integral part of loan

processing mechanism with relevant management measures integrated as part of

credit risk management in the SIDBI’s Project Cycle. A DGM level officer of the PIU

will be responsible for overseeing overall safeguards implementation. The staff

carrying out SDD will include adedicated E&S Specialist (ESS)4who will provide

overall support for safeguards management, conduct and facilitate overall capacity

building and awareness programs within SIDBI and its clients, and focus on E1

cases5though also be available for support on other cases as needed), Relationship

Managers (RM) at respective branch offices, and Credit Officers (CO) at Central

Loan Processing Cells (CLPCs) in regional offices. While the SDD and the

integration of resulting management measures in to loan appraisal/credit risk

management is detailed below, the institutional mechanism is presented under

Section 4.

Step 1: Screening

Procedure: As part of the loan screening, the RM from SIDBI’s branch office will

interact with the prospective client and identify the loan requirements (refer section

2.3.1 for details). As part of this process, the RM will collect the appropriate details

relating to E&S Safeguardsalong with the Loan Application, which will include: (a)

ascertain the current production process;details of proposed up gradation

/modernization /expansion with supporting flow diagrams indicating the input output

details including wastes / emissions, details / status relating to applicable

environmental regulatory compliances submitted by the prospective borrower(format

of E&S checklist attached at Annexure I, copy of the application submitted by the

MSME unit to the Pollution Control Board may also be sought, if required); (b)

checking the negative / exclusionary list not suitable for lending (refer Box 3); (c)

identify the risk category (E-I / E-II / E-III); (d) undertake site visit and make visit

observations, specifically on house-keeping, Occupational safety, and labour aspects

– child labour in specific.

Output: Completed SDD Report (format of SDD reportattached atAnnexure II). For

all E-II, E-III category cases (including brown and green field)SDDwill be attached to

the RM’s report. For E-I (green and brown field) SDD will be forwarded to for detailed

safeguards due diligenceby the E&S specialist (ESS). Along with the SDD, ESS will

explore opportunities for Loan Extension Services (LES) as part of the proposed

parallel technical assistance. As part of this process, Energy Efficiency Cell-EEC

(created within SIDBI for the purpose of promoting energy efficiency techniques in

4 The safeguards specialist will be dedicated to the safeguards function, will have relevant safeguards management experience and qualifications and will be

an integral part of the PIU and will report to DGM within PIU who will oversee safeguards management. The specialist can be a staff member, a consultant expert specifically hired and responsible for carrying out the functions required of the ESS and can be housed in SIDBI or its associate institutions including possibly ISTSL. An additional safeguards specialist may be considered if the number of cases/world load merits this. 5 As mentioned above in section 2.l2 above, SIDBI credit team has adequate capacity for safeguards management in other cases.

5As mentioned above in section 2.l2 above, SIDBI credit team has adequate capacity for safeguards management in other cases.


15

MSMEs) would also be involved on a need basis, especially in case of air polluting

units, with a view to achieve energy efficiency as well as environmental co-benefits.

The LES scope as part of the Project Technical Assistance is detailed out under

Annexure III. The SDD carried out by the E&S specialistwill update specific

recommendations on loan proposal. Additionally, the typical output from LES team

could include: (a)measures to mitigate safeguard risks which could lead to lending

recommendations; (b)supplementary loan requirements (which will be jointly followed

up by LES team with the appraisal team) for cleaner production including resource

efficiency, waste minimization, and pollution prevention; and/or (c) additional studies

through technical assistance under the project for future improvements and

consideration for lending

Step 2: Loan Appraisal

Procedure: Credit Officer (CO) at CLPC shall undertake desk review of information

submitted by the prospective borrower. As part of loan appraisal, CO will review the

SDD as well as the SDD prepared by the E&S specialist (for E-I cases only) and

assess the risks and recommend suitable measures to cover the risks. The

measures will be linked to disbursement conditions/covenants in the detailed

appraisal note. Typically, the measures could include: achieving formal Consent for

Operation from Pollution control board; establishing effluent treatment plant meeting

the regulatory compliance conditions, securing EIA clearance from competent

authorities, if required, compliance with health and safety requirements, appropriate

storage, handling, and disposal of hazardous wastes, etc.

Output: CLPC shall suitably incorporatein the Detailed Appraisal Note (DAN):

(a)highlights of theSDD Report of the RM; (b) CLPCs assessment of the E&S risks;

and (c) the measures recommendedby it to mitigate / manage the E&Srisks.

Step 3: Sanction

Procedure: Based on the information captured in the DAN and the Credit Risk Rating

with regard to the categorization of the unit (E-I / E-II / E-III), status of regulatory

compliances, E&S risk and mitigation measures proposed therefor, the Credit

Committee shall take a considered decision to either sanction or reject the proposal.

The Credit Committee may also stipulate suitable pre or post disbursement

conditions / covenants over and above those proposed in the DAN for effective

management & monitoring of E&S risks.

Output: Minutes of the Sanctioning Credit Committee recording the decision of the

committee including additional conditions / covenants, if any stipulated by it.

Step 4: Disbursement, Monitoring & Follow-up

Procedure: The Relationship Manager (RM) at BO processes the disbursement

requests from the borrower after completion of necessary loan documentation

formalities. RM undertakes a pre-disbursement visit to the unit to see the physical

progress of project implementation, check for any warning signals / issues, etc. As a

part of the disbursement note, RM also prepares a compliance chart indicating the


16

status of compliance of various pre-disbursement or other conditions, which include

conditions / covenants pertaining to E&S, stipulated by the Sanctioning Credit

Committee. After disbursement, the BO undertakes the monitoring and follow-up of

the loan account with regular follow-up visits. The findings of the visit are captured by

way of visit report as per standard formats.

Output: Disbursement alongwith the compliance chart, pre-disbursement and follow

up visit report/(s).

The role and requirements to be followed by the stakeholders under MSME – IIF

comprising MSMEs, SIDBI – BOs & CLPCs, Project Implementing (PIU) of SIDBI,

etc,are given in Exhibit 1.

3.2 INDIRECT FINANCE

The refinancing is carried out by setting institutional annual limits to PLIs, under

which refinancing is availed by the respective institutions. Generally, refinance is

sought for a cluster of loan accounts, with no set periodicity. The information

furnished to SIDBI is limited to basic details such as loan size, location, promoter’s

contribution, portion for which refinance is being sought.

SIDBI’s credit risk management process for indirect finance to Primary Lending

Institutions (PLIs) is restricted to assessment of institutional risks and not individual

loan risks. Under indirect finance product, the respective financial institutions are

obliged to honourtheir dues, even if the sub-loans are default or become non-

performing. Given this limited liability of SIDBI, the leverage for applying safeguards

due diligence is restricted. However, the reputational risks associated with the

refinance portfolio need to be appropriately addressed.

As part of streamlining the ESMF procedures, the following steps are proposed which

will be updated on time to time basis with due consent from the World Bank:

(a) All the eligible PLIs will be sensitized about the E&S risks through awareness and

capacity building programs and familiarizing them with ESMF provisions (in the

past, under SMEFD project, 5 PLIs have adopted the ESMF as part of their

corporate lending procedures). In this direction, SIDBI along with GIZ is already

working for establishing sustainable banking titled “Responsible Enterprise

Financing Project”;

(b) SIDBI ESS specialist to carry out safeguards due diligence for selected set of

cluster loans in the first year or 10 such initial cluster loansto establish a simple

and practical E&S criteria/template/tool for refinancing product. These cluster


17

loans, as well as the E&S criteria developed will be subjected to World Bank’s

prior approval and application for the subsequent refinancing loans.

3.3 STAKEHOLDERS CONSULTATIONS

The draft E&S Framework and due diligence process was shared with all the 13

Regional Offices of SIDBI. The Regional Offices in turn had shared with the

respective branches under their control besides displaying in the branch notice

board. The branches were also advised to hold consultations with the industry

representatives and local associations. It is learnt that the branches had also

discussed with a small group of SMEs to obtain feedback. Formal feedback was

received from two regional offices. Some of the feedback is listed hereunder:

- the draft frame work was discussed with some of our entrepreneurs / Industry

association who have generally expressed satisfaction over the same.

- getting this information could add to turn around time [TAT]

- clients may not always accept our advice for different reasons and prefer to just

comply with law of land. This may have a bearing on business.

-

.


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Exhibit 1: Roles & Responsibilities of Stake Holders for Implementation of Environmental & Social Risk Management Framework

S. No.

MSMEs SIDBI – BO & CLPCs SIDBI - PIU

1. To fully comply with all Central and State or local regulatory requirements

To have mandatorily valid Consent to Operate and fully comply with all consent conditions/requirements

To conduct self-check for regulatory compliance(s) and rectify the lapses.

Submit E&S Questionnaire duly filled in along with the loan application

Submit copies of all Regulatory Compliance & other related documents with SIDBI

To encourage / explore and include cleaner production and EE measures leading to GHG emissions reductions, improvement in operational efficiencies, etc.

To share with SIDBI all regulatory compliance documents, periodic compliance reports, outstanding issues / show cause notices issued by SPCB with respect to violation of norms and remedial actions initiated thereof, including requirement for implementation of any specific emission reduction or pollution prevention measure(s), if any stipulated by the State or Central Pollution Control Board, etc.

To provide hindrance free access to 3rd party agencies appointed by SIDBI to during appraisal or pre / post-implementation.

To share with SIDBI the best environmental practices undertaken by it like adopting zero effluent initiatives or extent of reuse and recycling, cleaner technologies for better operational efficiencies with concurrent emission reductions, voluntary initiatives to achieve better emission standards than

Screening Stage : Relationship Manager (RM) at SIDBI BOs

Review of E&S Questionnaire submitted by the prospective borrower along with the loan application

Assessment of Environmental & Social compliances through discussions with the MSME unit and pre-sanction visit including Land / locational / sectoral regulatory issues (Legacy Issues) and Industry specific Regulatory compliances, details of proposed upgradation / modernization / expansion with supporting flow diagrams indicating the input output details including wastes / emissions; checking the exclusionary list not suitable for lending; undertake site visit and make visit observations, specifically on house-keeping, Occupational safety, and land, tribal people and labour aspects – child labour in specific.

Identify the risk category (E-I / E-II / E-III);

In case of E-II or E-III (including brown and green field), prepare a Safeguards Due Diligence (SDD) Report as a part of the RM’s report.

For E-I (green and brown field), SDDReport will be forwarded to EEC for detailed screening and exploring opportunities for Cleaner Production and Loan Extension Services (LES).

Loan Appraisal Stage : Credit Officer (CO) at SIDBI CLPCs

Desk review of information submitted by the prospective borrower; SDD Report of RM as well as the Report of the EEC (for E-I cases only)

Assess the E&S risks and recommend suitable measures to cover the risks. The measures will be linked to disbursement conditions / covenants in the detailed appraisal note.

Complete E&S aspects as part of the Internal Credit Risk Rating

Incorporate E&S Risk Assessment and Management section in the Detailed Appraisal Note (DAN).

Sanction Stage : Credit Committees at SIDBI

Based on the information captured in the DAN, Internal Credit Risk Rating and the risk categorization of the unit (E-I / E-II / E-III), status of regulatory compliances, E&S risk and mitigation measures proposed thereof, the Credit Committee shall take a considered decision to either sanction or reject the proposal.

The Credit Committee may also stipulate suitable pre or post disbursement conditions /

• To co-ordinate, manage and ensure compliance with the ESMF


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Exhibit 1: Roles & Responsibilities of Stake Holders for Implementation of Environmental & Social Risk Management Framework

S. No.

MSMEs SIDBI – BO & CLPCs SIDBI - PIU

regulatory norms through innovative (conventional or non-conventional) measures, among others

To comply with any other additional requirements / loan covenants related to revalidation of consent to operate or regulatory compliance so as to be fully compliant at all times through loan tenure.

covenants over and above those proposed in the DAN for effective management & monitoring of E&S risks.

Disbursement, Monitoring & Follow-up Stages : Relationship Manager (RM) at SIDBI BOs

Process the disbursement requests from the borrower after completion of necessary loan documentation formalities.

Undertake pre-disbursement visit to the unit to see the physical progress of project implementation, check for any E&S warning signals / issues, etc.

Prepare a compliance chart, as a part of the disbursement note, indicating the status of compliance of various pre-disbursement or other conditions, which include conditions / covenants pertaining to E&S stipulated by the Sanctioning Credit Committee.

After disbursement, monitor and follow-up of the loan account with regular follow-up visits. The findings of the visits shall be captured by way of visit report as per standard formats.


20

4. PROJECT INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS

4.1 INSTITUTIONAL ARRANGEMENTS

For the project’s administration and implementation, SIDBI has identified a multi-

vertical core team which will serve as the project implementation unit (PIU). The PIU

is headed by the Country Head and the PIU members have prior experience of

working with the Bank and other multi-lateral and bilateral partners. Staff resources

have adequate technical as well as fiduciary and safeguards experience.

In addition to the PIU, a consultative committee comprising external experts will be

supported by the parallel TA accompanying the project. This committee – with an

expected membership of seven to ten experts – will serve as a sounding board and

will provide feedback on project progress and initiatives. The committee will meet at

least twice yearly and in the initial years, more frequent interactions are expected.

Experts will be drawn from angel and early stage investors, financial institutions with

experience in any of the project’s components, and industry associations and similar

stakeholders.

The E&S aspects will be coordinated and managed by an officer not below the rank

of Deputy General Manager who shall be the part of the PIU. He shall be supported

by an E&S specialist (ESS) dedicated to the safeguards function. For ease of

operation and effective management of safeguards due diligence, the ESMF

implementation responsibilities will be the responsibility of the ESS who is an integral

part of the PIU. In addition, ISTSL/or other firm that may be selected will provide LES

which are complementary to improving overall performance of MSMEs in terms of

environmental management and resources efficiency as part of parallel technical

assistance activities. The ESS will further: (a) coordinate with Energy Efficiency

Centre (EEC) of SIDBI for involving them in specific cases of energy efficiency

arising out of LES; and (b) coordinate with other banks and financial institutions to

facilitate awareness generation programs proposed under the project.

To facilitate project implementation a detailed Operations Manual (OM) is being

prepared. The OM includes details on the implementation arrangements, including

the principles of the appraisal processes that will be followed, fiduciary and

safeguards arrangements (which are also defined in the ESMF), etc.

4.2 CAPACITY BUILDING

SIDBI will be holding either separately or part of other training programmes for orientation

and capacity building on Environment and Social aspects of the project targeting credit

officers, SMEs and cluster associations, PLIs. This will include screening, appraisal and

regulatory requirements related to environment, occupational health and safety, labour,

social security/welfare, land, tribal and related issues. Around 3-4 training programmes are

targeting in year 1 and additional programmes will be organized as per need.


21

SIDBI will also facilitate convergence of its existing engagement with different multi-lateral

and bi-lateral partners towards resource efficiency, and environmental management across

its lending portfolio.

4.3 MONITORING AND REPORTING

The monitoring and reporting on E&S safeguards management will be carried out at two

levels. The first level monitoring and reporting relates to branch level coordination with the

MSMEs which includes: (a) compliance reporting on agreed lending covenants; (b) training,

capacity and awareness generation activities; and (c) annual internal audit on compliance

with ESMF provisions. The second level of monitoring and reporting pertains to PIU level

effort where, the ESS will synthesize the branch level reporting to prepare half yearly

reports. In addition, ESS will conduct regular audit and verification of compliance of E&S

safeguards requirements at E-1 category MSMEs, on sample basis, covering at least 25% per

annum. ESS will also cover half yearly monitoring and reporting of status of implementation

of E&S management measures and/or compliances for indirect financing cases. ISTSL’s

monitoring and reporting efforts will also focus on documenting good practices as well as

lessons learnt on regular basis. The half yearly reports will be regularly shared with the

World Bank in November and May (broad structure of report template attached as Annex

IV). In addition, SIDBI will provide relevant information for all the E-1 category sub-project to

the Bank on regular basis (the reporting format is part of the IUFR and is enclosed as

Annexure IV)..Bank’s safeguards specialists will work in close collaboration with SIDBI team

and to provide necessary inputs.

An organogram representing the work flow is given hereunder:


22

MSME Growth Innovation and Inclusive Finance Project

Detailed organogram for E&S Framework


23

Annexure I

Environmental & Social (E&S) Checklist

(To be filled in by the prospective borrower and attached to the Loan Application)

S.

No. Particulars Guidance Notes

1 Enclose flow charts describing the existing as well as the proposed Manufacturing Process. The flow charts should indicate the input output details including wastes / emissions

Attached

Yes/No

2 Valid Consent(s) /Clearances from SPCB/CPCB Yes/No /Not Applicable / Applied For

If ‘Yes’, attach copies and provide evidence for compliance oftheconsentconditionsby the unit.

If ‘No’or‘Not applicable’, statereasons clearly. If ‘Applied For’, attach copies of necessary proofs.

3 Hastheunitinstalledpollutioncontrolmeasurestocheckreleaseofairpollutantsintotheatmosphere?[UseofVenturiScrubber/SimpleScrubber,Bagfilters,ElectroStaticPrecipitators (ESP)etc.]

Yes/No /Not Applicable

If ‘Yes’, state since when and summarisethepractices and indicate the associatedenvironmentalbenefitsaccruedthereof.

If ‘No’,statewhether the unithasany suchplansin near future.

4 Does the unit comply with SPCB/CPCB'sindustryspecificnorms forair emissions? Yes/No

If ‘No’, statereasons clearly.

5 Does the unitkeepits generatedwasteat adesignatedplace? Yes/No


6 Istheareaofwastestorageisadequatelycoveredtostopleakages/runoffofchemicalsduringrains? Yes/No



24

7 Doestheunitensurethatthewaste/byproductsleavingthepremisesoftheunitaresafelydisposedoff? Yes/No


8 Doestheunitmapitswaterconsumption(throughflowmeters)foreachofindustrialprocesses? Yes/No


9 Istheunitrequiredtotreatitsprocesswastewateras per theConsentto Operate(CTO)2 Yes/No


10 Doestheunittreatitseffluentbeforereleasingit outside thephysicalboundaryofthe unit? Yes/No


11 Doesthewastewaterreleasedexceedanylimitspecifiedinthewastewaterstandardsissuedby the SPCB/CPCB?

Yes/No


12 Doestheunitdisposesoffallwastewaterthroughsewer system? Yes/No


13 IsRain WaterHarvesting(RWH)installed in theunitpremises? Yes/No /Not Applicable


14 Whether the unit has received any noticefor regulatorynoncomplianceorviolationof norms or consentconditions.

Yes/No

If ‘Yes’,statereasons,whichledtoindustrybeingnotifiedas‘noncompliant’andactionsundertakentobecomecompliant. Stateclearly whetherthe issue hasbeenresolved or not. If not, statereasons clearly.

15 Whether the unitcarry out periodical environmental monitoringasper the stipulated regulatory norms or onits own initiative

Yes/No

If ‘Yes’, attach copies of last two quarters monitoringreport.

If ‘No’, state reasons clearly fornot conductingperiodicalenvironmental monitoring.


25

16 Whether the unit has adopted any best environmentalpractices – like ‘Zero Effluent initiatives’or effluentreuse /recycling; ‘Cleantechnology initiatives’, etc.

Yes/No

If ‘Yes’, state since when and summarisethepractices and indicate the associatedenvironmentalbenefitsaccruedthereof.

If ‘No’,statewhether the unithasany suchplansin near future.

17 Does the unit employ child and / or forced labour for its operations Yes/No

18 Does the project requires compulsory land acquisition causing displacement of people or communities from private or public lands having negative impacts on livelihoods?

Yes/No

19 Whether the unit / project is located in, areas of significant settlement and/or collective attachment of tribal people.,

Yes/No

20 Whether the project activities involve significant adverse impacts or degradation of naturaland/or critical habitats.

Yes/No

21 Will the project have the potential to havesignificant impacts on forests? Yes/No

22 Will the project result in damage of thehabitat of any species listed in the schedulesof the Wildlife Protection Act?

Yes/No


26

23 Whether the project activities involve significant use of banned Pesticides /herbicides Yes/No

24 Whether project activities involve significant alteration, damage, or removal of any critical culturalheritage.

Yes/No

25 Whether industry has accreditations likeISO14000; OHSAS 18001or has received any recognitions for being environmental or sustainable / friendly initiatives or havingbest EHS practices.

Yes/No

If ‘Yes’, provide a list of all such accreditationsalongwithdocumentaryevidence.

To be signed by the promoter


27

Annexure II

Safeguards Due Diligence (SDD) Report (To be filled in by the Relationship Manager at the respective BO and

should be submitted to CLPC as a part of the RM Report)

RO/ BO :

Name of the unit :

S. No.

Particulars Comments / Remarks of the RM

1 Duly filled in E&S checklist submitted by the unit along with necessary attachments / documents

Yes/No

If ‘No’,statethe reasons

If ‘Yes’, confirm adequacy and give brief highlight of the same.

2 Whether the information given in the E&S checklist is generally in line with that observed during the pre-sanction visit particularly on house-keeping, occupational safety, and labour aspects – child labour in specific

Yes/No If ‘No’,give details.

3 Whether the unit has valid Consent(s) /Clearances from SPCB/CPCB

Yes/No / Not Applicable / Applied For

If ‘Yes’, give brief details like Number and date of the letter, issuing authority, nature / name of consent / clearance, validity period, etc,

If ‘No’,statethe reasons and possible remedial measures.

4 Is the unit / project eligible for financing in terms of the E&S Guidelines including negative / exclusionary list (refer Box 3)

Yes/No If ‘No’,statethe reasons.

5 Categorize the unit / project as the E&S Risk Category [E-I, E-II or E-III] – (refer Sectoral Guidebook, E&S Checklist and other documents submitted by unit as well as pre-sanction visit observations)

E-I / E-II / E-III

Briefly statethe reasons / provide justification.

[Signature & Name of RM]

Date :

Place :


28

Annexure III

Loan Extension Services for MSMEs

Key Learning from Financing EE at MSME Project (WB-GEF Grant Funded)

As a developmental initiative, SIDBI along-with Bureau of Energy Efficiency (BEE) is

implementing World Bank – GEF Grant funded Project on “Financing Energy Efficiency at

MSMEs” in five targeted MSME clusters in India. The major activities implemented as part of

the project include: (a) capacity building for Energy Efficiency (EE) improvement; (b)

technical assistance for Investment Grade EE Proposals and implementation hand holding;

and (c) knowledge management. The summary learning from the project implementation

includes:

1. MSMEs have Limited Institutional, technical and financial capacities, but are slowly

becoming aware of the benefits of the Energy Efficiency (EE).

2. Lot of handholding support is required by MSMEs for implementation of EE

measures. The handholding support includes: (i) conducting energy audit, (ii)

preparation of detailed project report, (iii) guidance and support during

implementation of EE measures (including identification & selection of right vendors,

technical assistance during erection, commissioning, trial-runs, etc.)

3. MSMEs do not have higher level technical understanding especially in respect of

expansion and/or modernization. The technical aspects are purely managed through

knowledge and wisdom gathered from vendors or through the experiences shared by

fellow MSMEs – There are limited independent and customized decisions based on

strong technical assessment.

4. On the supply side the technical Consultantsare often reluctant to work with MSMEs

due to the fear of disputes or non-payment of fees, and limited margins, etc.

5. There are limited or no programs which comprehensively address technical inputs for

efficiency improvements, upgradation/scaling up needs, and linkages with loan

opportunities - Linking the EE program with a Loan event can catalyze the EE

investments

6. There are several untapped improvement opportunities (which make commercial

sense) like Waste Minimization and Cleaner Production, lean management, Business

Development Services (BDS), etc. There is clear demand for such services –

Experience of BDS pilots as part of SMEFD Project was highly encouraging.

7. Typically, the loan event is the best opportunity for taking up the above initiatives

where, the entrepreneurs make up their minds for quantum leap and it is also


29

amenable to take up such initiatives (especially since the entrepreneur will be

prepared for production down time).

Current SIDBI Intervention to Link Loan Event with Technical Services

Learning from the implementation of GEF-WB grant funded project, SIDBI launched an

intervention named 4E (End to End Energy Efficiency) Solution. The intervention is expected

to help MSMEs adopt energy efficiency measures, provide support during implementation by

way of assistance in identification of vendors for EE equipment/technologies and during

installation & commissioning, etc. The intervention was launched on World Environment Day

– June 5, 2014. Currently the intervention is implemented on a pilot scale covering SIDBI

catchment areain Delhi NCR, Uttar Pradesh, Punjab and Haryana. India SME Technology

Services Ltd. (ISTSL), an associate institution of SIDBI, is spearheading the intervention.

The key services offered under this intervention include:

Comprehensive technical support including technical studies, need assessment for

technology upgradation, vendor identification, handholding through strong

implementation support up to commissioning.

Linking up with ongoing loan event.

While standard operating procedures and business processes are established, the initial

demand is encouraging where the entrepreneurs are willing to pay service fee which is

nominal (in the range of INR 50,000 to 1,50,000). Although it is too early to conclude, it is

noted that the loan event is the best opportunity to promote efficiencies through technical

services. There is also increasing feedback that there is considerable appetite for loan

extension services as referred in point 6 above.

Initiative Proposed as part of the MSME Growth Innovation and Inclusive Finance

Project

Component 3 of the proposed project focuses on lending to manufacturing sector for

expansion, modernization/technology upgradation. The lending activities under this

component could be supplemented with technical assistance [which could be termed as

Loan Extension Services (LES)], where depending on the type and categorisation of unit (E I

or E II category), and interest loan appraisal could go through a quick opportunity

assessment6 for overall improvement of the unit. These services could tap wide range of

improvements including energy efficiency, cleaner production, lean management, etc. on the

lines of 4E initiative mentioned above. Such an effort could also help systematically monitor

and document the overall achievements in development objectives including green agenda

which typically include: GHG emission reduction, waste minimization and pollution

6 Typically, the opportunity assessment is done through a Walk Through Audit (WTA) which could be

completed within a span of one to two weeks (including interaction with unit, logistics for WTA, etc., while the actual WTA would not take more than a day or two)


30

prevention, lean managed MSMEs, etc. In addition, the available data from WB-GEF project

shows that the LES increases the loan size and thereby reducing the transaction costs

disbursing the line of credit. In terms of operationalizing this effort, it is required to:

Commission consultancy services to provide pool of technical expertise to SIDBI

appraisal officers,

Support the project by including technical staff within SIDBI to coordinate LES activities.

Since ISTSL is already offering such services,there are synergies in a collaboration and

SIDBI could also, if required, may make use of the services of ISTSL through appropriate

mechanisms. Since LES is expected to benefit the loan seeking MSMEs, the expenses for

such services could be integrated in to chargeable upfront loan processing fee. Alternatively,

depending on availability of grant money, these services could be offered at free of cost

initially.


31

Annexure IV

Six monthly report outline

a) List of cases reviewed and key observations/remarks;

b) Documentation of good practices, if any;

c) Other progress on safeguards/trainings

d) Any other observations


32

Annexure IV continued

IFR Format for Reporting during Implementation

In INR

Current Quarter Year to Date

Cummulative to

Date

1 2 3 4 5

A Spurring Early Stage and Risk Capital Finance

i) PFI 1

ii) PFI 1

iii) PFI 3

……………………

Total (A)

II Supporting Service Sector Financing Models

i) PFI 1

ii) PFI 1

iii) PFI 3

……………………

Total (B)

III Supporting Finance to Manufacturing Sector

i) PFI 1

ii) PFI 1

iii) PFI 3

……………………

Total (C)

Grand Total (A+B+C)

______________________________________ ____________________________

Dy. General Manager/General Manager General Manager/Chief General Manager

SIDBI SIDBI

Name of the MSME Borrower

Location of MSME

SIDBI/PFI Branch

Type of Activity of the MSME

Nature of Loan

Environmental Category

Loan Sanctioned

Date of Sanction

Disbursed and claimed up to last quarter

Disbursed and claimed during the reporting quarter

Total disbursement and claimed till date

Sr.No. Item

Actual Eligible Expenditure

Information on sub-loans to MSMEs will be prepared by SIDBI and each PFI preferably on EXCEL sheets

containing the following fields.

Interim Unaudited Financial Report

MSME GROWTH INNOVATION AND INCLUSIVE FINANCE PROJECT

Loan No _____ IN

Implementing Agency - Small Industries Development Bank of India

Details of Loans Disbursed to PFIs for the quarter ended __________________

Documents

MSME GROWTH INNOVATION AND INCLUSIVE …documents.worldbank.org/curated/en/584491468034205771/pdf/E47180V...MSME Growth Innovation & Inclusive Finance Project Environment & Social